Private Equity Tax Planning in 2010
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Transcript of Private Equity Tax Planning in 2010
PRIVATE EQUITY TAX PLANNING IN 2010
February 2010
Copyright © February 10 BDO LLP. All rights reserved.
FUND STRUCTURING TECHNIQUES
Copyright © February 10 BDO LLP. All rights reserved.
ADAM FRAISTel: +44 (0)20 7893 2392Email: [email protected]
February 2010
FUND STRUCTURING – WHAT ARE WE TRYING TO ACHIEVE?
Want to avoid withholding
on funding “return” and
CGT on exit
Want to receive as
capital and pay 18 per
cent or lower
Want to reduce tax below cost of
remuneration – 53.8 per cent (→
63.8 per cent)
Executives
CarryFund
MainFund
Carry
distributions
Investors
Bidco
Target
Executives
Management Entity
GP
Priority
Profit Share
“Remuneration”
Management fee
Investment
returns
Preferred
return & profit
share
WHAT INVESTORS WANT - AVOIDING WITHHOLDING TAX
International Strategies
• Use of double tax treaties but can be
time-consuming and sometimes complex
• Interposing a company resident in treaty
jurisdiction
UK Strategies
• Dividends do not attract withholding
• Quoted Eurobonds
• Discounted Securities
• Sale “cum interest”
Fund
Investments
Investors
Dividends on equity
Interest on loans
WHAT INVESTORS WANT - AVOIDING CGT ON EXITING
INVESTMENTS
Sale
Fund
Investments
Investors• Only relevant where target country levies
source CGT (not UK)
Strategies
• Use of double tax treaties but again time-
consuming and complex
• Favoured strategy is to interpose a treaty
company
WHAT PE EXECS WANT FROM MANAGEMENT FEES AND
CARRY
• Reduce their exposure to income tax
• Capital gains – flat rate of 18 per cent
• Dividends
- 25 per cent
- 36 per cent from 6 April 2010 (taxable income > £150k)
• Earned income/interest
- 40 per cent
- 50 per cent from 6 April 2010 (taxable income > £150k)
• National insurance
- 1 per cent on all income
- 2 per cent from 6 April 2011
- 12.8 per cent for employers (13.8 per cent from 6 April 2011)
CARRIED INTEREST – WHY MIGHT YOU PAY MORE THAN 18
PER CENT?
• Taxed as employment income
- On receipt
- On sale
• So what do you do?
- Do not be an employee!
- Or, meet the MOU
• Increase in carry entitlement post fund set up could be taxed as income
CARRIED INTEREST – HOW COULD YOU PAY LESS THAN 18
PER CENT?
• With base cost shift
• If you are non-domiciled and plan well!
• Go offshore
• If distributions to the carry partnership are non-taxable
CARRIED INTEREST – THE FUTURE?
• Carried interest gains taxed as income
• Implications of what happens overseas
CARRIED INTEREST – INTERNATIONAL COMPARISONS
18.0%15.0%
12.5%
30.1%
21.0%
28.2%30.0%
35%
0%
5%
10%
15%
20%
25%
30%
35%
40%
UK US Germany Spain Italy Switzerland France
Countries
Tax rates
CGT Income tax
CARRIED INTEREST – THE FUTURE?
• Carried interests gains taxed as income
• Implications of what happens overseas
• Risk of higher CGT rates
TOP RATES OF TAX 1974 TO 2010
income tax
cgt
1974
10
80
70
60
50
40
30
20
2008 20101979 1988 1998
CARRIED INTEREST – THE FUTURE?
• Carried interests gains taxed as income
• Implications of what happens overseas
• Risk of higher CGT rates
• Arguments that the fund is trading in shares
• Lobbying versus political manoeuvring
GPLP GP Co
Fund GP LP
Fund LP
Other InvestorsGains &
Dividends
All other
income &
gains
PE Execs
Gains
Dividends Gains Interest
Dividends
TAX STRATEGIES FOR THE FUND MANAGER
ManagerLLP
Management fee
PE Execs
Profit share
GP Co
TheFund(s)
General Partner LP
CarryPartnership
UKadviser/
manager LLP
Overseas subsidiaries
PE Execs PE Execs
THE “TYPICAL” PE FUND STRUCTURE – UK PE TEAM
Investors
SPVs
Targets
LATEST TECHNIQUES FOR STRUCTURING
TRANSACTIONS
LEE JEFFERSONTel: +44 (0) 20 7893 3344Email: [email protected]
February 2010
Copyright © February 10 BDO LLP. All rights reserved.
A TYPICAL STRUCTURE
Generally seeking to:
• maximise effective tax relief on
acquisition debt against operating profits
• minimise withholding taxes
• minimise transaction taxes/capital taxes
• minimise tax on exit
• minimise tax for investors in the fund
• minimise tax on management
Target
Bidco
Newco 2
Newco 1
TopCo
FundLP
Senior
Bank Debt
Mezzanine or
subordinated
debt
Shareholder
debt
Management
Management
debt
MAXIMISE EFFECT TAX RELIEF ON ACQUISITION DEBT
AGAINST OPERATING PROFITS
• Debt push-down via group relief, tax
consolidation or mergers
• Opportunities for a double dip? (eg a
Belgium notional interest deduction
company?)
• No withholding tax in the structure on
debt
• Ability to service the debt
• Thin cap and transfer pricing rules (and
worldwide debt cap rules)
• Management of timing of tax deductions,
especially on shareholder debtTarget
Bidco
Newco 2
Newco 1
TopCo
FundLP
Senior
Bank Debt
Mezzanine or
subordinated
debt
Shareholder
debt
Management
DEBT PUSH DOWN – AN EXAMPLE
• Every jurisdiction is different
• Some jurisdiction harder than others (Belgium, Canada)
• Even a basic leverage solution can become complex
Example
• UK target, but insufficient UK profits therefore ineffective interest shield
• German group had to be held by a trading entity due to WHT
• Therefore leverage under the UK Tradeco, using intra-group debt
• But still have Germany earning stripping rules which limit deduction to 30 per cent EBITDA
• UK tax – SSE for UK target
German Tradeco
German Holdco
UK Tradeco
UK Target
Bank
Debt
UK Bidco
GermanTradeco
OtherTradecos
CORPORATE RESIDENCE
• Maybe a structure you have seen as:
a) No WHT on interest paid from the UK to Lux
b) No WHT on redemption of CPECs
c) No capital gains tax on disposal by Lux
Midco
• Used for many jurisdictions
• UK tax rules – the basics
- UK incorporation
- UK “central management & control”
� Turns on a combination of where the
strategic
board meetings take place and the tax
residency of the board members
• Recent case won by HMRC – Laerstate
• Practicalities and Best Practice
Target
UK Bidco
Lux Midco
Lux Topco
FundLP
Bank
CPECs & PECs
debt
debt
CORPORATE RESIDENCE
UK companies seeking to minimise tax bills by locating abroad would face years of scrutiny to ensure senior management decision have genuinely relocated, a senior official at HM Revenue & Customs has said.
Even if board meetings are held outside Britain among non-resident directors, a company could be deemed UK-resident if evidence – potentially including travel schedules, e-mails, diary entries and notes of phone calls – suggested key decisions were taken from within the UK.
Mr Hartnett said: “Some companies claim to have changed their resident and left the UK. Investigation and litigation in the UK will establish that.”
THE WORLDWIDE DEBT CAP RULES
Aim of legislation
• To prevent groups putting a greater
amount of debt into the UK than the group
as a whole has borrowed
• Compare the consolidated worldwide
finance expense, ie for accounts v UK
companies finance expense for tax
Interaction with late paid interest
• Interest/discount spread in the accounts
• Tax rules only allow a tax deduction when
paid in some situations
• So finance expense for accounts < finance
expense for tax where interest has rolled
up
Commencement Date
• A.P.s beginning on or after 1 January 2010
UK TopCo(Non-UK)
FundLP
Non-UKCo UKCo
Bank
Equity
Debt Debt
Bank
Group
• As defined by IAS
• “Ultimate Parent” – Not a CIS
Gateway Test
• Cap does not apply if UK net debt < 75 per cent
worldwide gross debt
Procedure to calculate Disallowed Amount/Example
• Available Amount = Worldwide group’s gross
consolidated finance expense
= 6 + 3 = 9
• Tested Amount = UKCo intra-group and third party
finance income and expense (so
long as this is a net expense),
for tax purposes (i.e. after
transfer pricing, late paid
interest, etc)
= 10
• Disallowed Amount = Tested Amount – Available
Amount
= 10 – 9 = 1
UK TopCo(Non-UK)
FundLP
Non-UKCo UKCo
Bank100 @
6% = 650 @
6% = 3
Equity
120
Debt
50 @
10% = 5
Debt
70 @
10% = 7
Bank
BUT YOU MAY NOT DO THIS ANYWAY!
THE WORLDWIDE DEBT CAP RULES
TIMING OF TAX DEDUCTION ON SHAREHOLDER DEBT
To PIK or not to PIK
• Market value
• Dry tax charge for management and co investment?
• Administration and withholding tax
• Trap for the unwary?
→Capitalisation = An issue of shares = a funding bond
→Accrued income scheme
TRANSFER PRICING & SHAREHOLDER DEBT (AND BANK DEBT)
• Determine the amount of debt that a borrower could borrow from an
unconnected lender having regard to the terms on which an unconnected
borrower would be willing to lend
• New TP group set up in 2009 by HMRC
• New penalty regime (which can be 10 per cent of the reduction in losses)
• Transfer Pricing litigation – DSR Retail Ltd came in 2009
- More in the pipeline
- Outsourcing to a firm of lawyers!
• Where are HMRC currently?
MINIMISING VAT LEAKAGE
STEPHEN KEHOETel: +44 (0)20 7893 2404Email: [email protected]
February 2010
Copyright © February 10 BDO LLP. All rights reserved.
AGENDA
1. Fund Structure
2. Deal fees
3. EU challenge to VAT grouping
4. ECJ Ruling in SKF
TYPICAL UK STRUCTURE
FM
VAT groupregistration
GP
PPS
LP
ManagementFee
OFFSHORE STRUCTURES
• Fund and Manager offshore
• Offshore fund but Manager in the UK
• EU complications
DEAL FEES - WHEN IS VAT RECOVERABLE?
• You have received the service
• You have been invoiced for the cost
• You have used the services to support a taxable business activity
TYPICAL STRUCTURE – POST COMPLETION
Newco
VAT group
Target Co
invoicedDealCosts
PROBLEM AREAS
1. Date of Newco’s incorporation
2. Engagement letters
3. Abort fees
4. Is NEWCO in business?
Newco
Target
The Fund Partly exempt
Servic
e?
Fully taxable
Supplier
InvoiceInvoice
RECOMMENDATIONS
• Incorporate NEWCO from day 1
• All engagement letters with NEWCO
• DD reports addressed to NEWCO
• Board minutes record NEWCO’s intentions to make acquisitions and manage the
business
EU CHALLENGE TO VAT GROUPS
• Holding companies & possibly GPs may be excluded
• Implications for deal fees and fund management fees
• Litigation is likely to take 12-18 months and any action should not be
retrospective
ECJ RULING IN SKF AB
• Historically VAT cannot be recovered on costs relating to a company sale, unless
the purchaser is based outside the EU
• ECJ was asked, should this always be the case?
• No if similar to a TOGC or there is no direct link between the costs and the
share sale
• National Courts to decide, HMRC are placing claims on hold pending a review by
their lawyers
Copyright © February 10 BDO LLP. All rights reserved.
THANK YOU FOR LISTENING
ANY QUESTIONS?